New VMware chief faces spotlight

Commentary: Maritz must calm shareholders, customers and employees

SAN FRANCISCO (MarketWatch) -- Paul Maritz is still famous at Microsoft Corp. for being one of the few executives to remain unruffled during the harsh grilling by the government's top prosecutor, David Boies, in the antitrust trial of the software giant in 1999.

So when he takes the stage Tuesday as VMware Inc.'s
VMW, +0.06%
new chief executive, the cool-headed Maritz is not likely to wilt under the spotlight when he addresses the company's annual user conference in Las Vegas.

But the pressure is on.

Maritz, who joined VMware in July after co-founder and CEO Diane Greene was shown the door, needs to convince investors that he has a plan for the former Silicon Valley darling. The dominance of VMware, which had one of the most successful tech IPOs since that of Google Inc.
GOOG, -3.28%
is ironically being threatened by Maritz's former employer
MSFT, -2.03%
and others in the software industry, which are developing their own versions of virtualization software for computer servers.

"They are facing some competitive challenges," said Joel Fishbein, an analyst with Lazard Capital Markets, contending that Maritz's presentation may be "key in determining investor sentiment surrounding the ongoing changes at the company."

VMware was founded in 1998 to develop a lower-cost version of a partitioning technology created by IBM Corp.
IBM, -1.37%
in the 1960s for its mainframe computers. VMware designed similar software for Intel-based servers that now run many corporations and their data centers. Virtualization lets portions of a server act as an efficient but separate computer system and in recent years has become critical for companies in making servers less costly to run. VMware had sales of $1.3 billion in fiscal 2007.

The market had fallen in love with virtualization, and VMware, by the time the company went public in August 2007. The stock nearly doubled from its $29 IPO price on its first day of trading, and it soared past the $125 mark inside of three months.

Tempers flare

But high expectations made the company particularly vulnerable to turmoil.

Reports grew of feuding between VMware executives and executives at EMC Corp.
EMC, -0.68%
the data-storage giant that still owns a large majority stake of VMware. In July, Greene, a well-liked computer scientist and former naval architect who founded VMware with her husband, was shown the door by EMC chief Joe Tucci, who also serves as chairman of VMware.

Morale reportedly has been weakened by a string of high-level departures. Among those was that of Richard Sarwal, executive vice president of research and development, who returned to Oracle Corp.
ORCL, -0.08%
less than a year after leaving the business-software giant.

An even more notable departure took place last week when Mendel Rosenblum, Greene's husband and VMware's chief scientist, left the company. According to a New York Times report, Tucci had asked Rosenblum to take Greene's seat on the company's board, which he refused to do.

"It's a classical situation of the brains just walking out the door," said Simon Francis, a partner with CTPartners, an executive recruiting firm, in its Redwood City, Calif., offices. "It's embarrassing, now every customer knows they are in turmoil."

Maritz was brought in to replace Greene at the helm. He had spent 14 years at Microsoft, where he helped develop and market products such as Windows 95. He had worked at EMC since the company acquired his cloud-computing startup, Pi Corp, in February.

"The new CEO has to bring in some new talent," Fishbein said.

Pressure is on

Apart from the turmoil at the top, the biggest concern for VMware investors is Microsoft's entry, along with other rivals, into virtualization. Charlie Di Bona, a Sanford Bernstein analyst, wrote in a note Monday that even though VMware management has made some progress in setting more realistic investor expectations, the bar is still set too high.

Microsoft compounded investors' fears by unveiling one version of its virtualization software, Hyper-V, just last week, as a free, stand-alone product. Microsoft is aggressively seeking to win market share from VMware, by launching new products and making it easier for customers to license and use those products with its own.

VMware is trying to counter the threats from the competition, which also includes other big software makers like Oracle
ORCL, -0.08%

Software giants and open-source projects are now "trivializing" VMware by developing their own versions, said Rob Enderle, principal analyst with the Enderle Group.

The company also develops desktop virtualization software, which lets a desktop run different operating systems simultaneously, and just announced a cloud-computing initiative, to expand VMware technology to virtual data centers.

On the desktop, however, VMware faces Citrix
CTXS, -0.74%
which owns a popular open-source desktop virtualization product. Di Bona said he believes VMware's push into nonserver markets, principally desktop, will be more difficult, with firms like Citrix better positioned.

Trip Chowdhry, an analyst with Global Equities Research, said in an interview that VMware's stock, which has already lost nearly three-quarters of its value since last fall and has shed more than 35% since Greene's abrupt departure, could be cut in half again over the next 12 to 18 months.

"I don't think investors should jump on it," Chowdhry said. "Even though Paul Maritz has very strong credentials, I don't think he has the right business skills to turn a feature into a category killer. ... Do you think you can find any executive on the planet who can turn a spell checker into an industry? Virtualization is not an industry."

Maritz needs to tell investors how the company plans to confront this onslaught of competition, and talk about any other new directions or ideas he has for VMware. He has to please three different audiences: customers, shareholders and employees.

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